OECD is wrong, wrong, wrong on interest rates

I very much respect the detailed analysis prepared by the OECD on international economic issues. However, I’m afraid the Paris-based think-tank has got it so very wrong in its call for UK interest rates to rise by the final quarter of this year, as reported on the Guardian website today.

Incredibly, the OECD is calling for base rates of 3.5% by the end of next year, a move that would strike a major blow to businesses and homeowners.

True, CPI inflation is currently running at 3.7%, well above its symmetrical target of two per cent. However, the Bank of England expects CPI to fall back to target in 2011. Last week, in his letter to George Osborne, the Chancellor of the Exchequer, Bank Governor Mervyn King specifically said that temporary factors, including high oil prices and the effect of putting VAT back to 17.5%, were “masking the downward pressure on inflation from the substantial margin of spare capacity in the economy”.

And even more important is the fact that the UK achieved economic growth of just 0.3% in the first quarter of 2010, lower than the 0.4% achieved in the fourth quarter of 2009. Again, there might have been specific factors involved, namely the severe winter weather of January that may have kept consumers in their homes and out of the shops.

However, growth in the UK is by no means assured. Less so, in fact, since the Coalition Government has taken the highly questionable decision of cutting government spending by £6bn this year, even though one coaltion partner, the Liberal Democrats, specifically argued against that very policy in last months General Election campaign.

The UK’s inflation targeting regime is structured very precisely. The Monetary Policy Committee of the Bank of England meets every month to weigh the economic evidence before making its decision on base rates. To start prescribing interest rate rises well into the future, when we don’t know what economic circumstances we face, is precisely what the inflation targeting system is not supposed to do. The MPC must ignore this knee jerk statement from the OECD.

Written by Tim Page

I’m a Senior Policy Officer at the TUC, responsible for economic and industrial policy. I also cover science policy, public procurement and high performance workplaces. I started my union at the Amalgamated Engineering Union, which is now part o…